New Markets Tax Credit

The New Markets Tax Credit was enacted in 2000 as part of the Community Renewal Tax Relief Act, one of the last pieces of legislation to be passed under President Clinton. Originally authorizing $15 billion in credits to be distributed over seven years, the program has been extended through continuing resolutions ever since. Buoyed by the American Recovery and Reinvestment Act of 2009 (stimulus bill), New Markets Tax Credits received a $5 billion allocation that year.

The New Markets Tax Credit is modeled, to some extent, on the Low Income Housing Tax Credit [LINK to Low Income Housing Tax Credit page] but with three key differences: 1) New Markets finances commercial, not residential, development; 2) rather than having states fund specific projects, the federal government makes direct allocations to community development entities, who then place funds in specific community revitalization ventures; and 3) the New Markets Tax Credit is a "shallow" rather than "deep" subsidy. In other words, New Markets aims to facilitate community investments that are in the works but need a little bit of extra support to be market worthy. New Markets are not meant to be the lead source of financing.

The way New Markets allocations work is that community developers must create a community development entity or CDE that is certified by the Community Development Financial Institutions (CDFI) Fund at the U.S. Department of Treasury, which accepts applications on a rolling basis. A CDE is defined as any entity that serves or provides investment capital for low-income people or communities and allows residents of low-income communities to be represented on any governing or advising board of the entity. Some CDEs are subsidiaries of commercial banks; others are subsidiaries of CDFIs. These CDEs then apply for the right to receive "tax credits." These tax credits are then "syndicated" or sold to investors, providing equity that the CDE can place in community development projects and providing a tax write-off for the investor.

New Markets Tax Credits are worth 39 percent of the amount invested, which can be claimed by investors over a span of seven years. Investors are able to claim a five percent credit on the total amount invested for each of the first three years, and a six percent credit on the total amount invested in years four through seven.

To date, over 400 awards have been made, totaling more than $23 billion. The investments have helped created over 250,000 jobs in construction or in businesses located in low-income communities.

In order to receive funds from a CDE, a community project must meet two requirements. First, the revitalization effort must be located in a census tract with a poverty rate of at least 20% or a median income that is less than 80% of the median income for the area or the state. Second, the enterprise being developed must have a substantial connection to the location, based upon several factors, including location of business property, source of income, etc. Most business or commercial real estate projects that operate in low- to moderate-income areas are able to qualify.